Bad Business or Not, Angie's List is Simply Overvalued

Angie's List (NASDAQ: ANGI  ) appeals to the buyer beware in all of us. The company has made a business out of reviews you can, supposedly, trust. In late 2011, the company debuted on the public markets and has since rewarded investors with a more than 40% return, all while unable to post a positive bottom line. However, sales growth over that same time has skyrocketed more than 160%. While the business sounds innocent enough, a recent hit piece from Citron Research sent the stock down nearly seven points for the week. The question is: Does the exhaustive research report highlight anything that investors weren't already aware of? Let's take a look and see if Angie's List is a stock you should avoid.

Slam!
Citron Research is notorious for issuing scathing reports on a wide array of companies from Chinese mid caps to Intuitive Surgical. Opinions vary on the accuracy and integrity of the short-seller shop, but one cannot deny their influential prose and shocking statistics. As a public business, a Citron slam piece is one of the last things you want to deal with.

The title of Citron's report on Angie's List leaves nothing to the imagination: Bad Idea + Bad Business = Wall Street Fiction. In the piece, the firm argues that, at best, Angie's is worth $6 per share -- a far cry from today's $23 price point. The synopsis is as following:

  • Angie's List has a terrible reputation among its customers, both end users and businesses. Customers have a hard time canceling memberships and question the integrity of the listings. Most listed businesses have an "A" grade, and seemingly anyone can apply for a listing without any due diligence on behalf of Angie's List. Businesses complain that they have to pay up for placement (in the $000s) and that it resembles a pyramid scheme.
  • The company has increased its sales professionals with an inadequate return in terms of new customers (around 1.14 customers per month, per sales person).
  • Companies like Yelp (NYSE: YELP  ) have much greater scale and are free of charge to customers. Even though they are not quite in the same space (Angie's List focuses on home repair, dentists, trained professionals, etc), Citron believes Angie's moat is nonexistent.
  • When compared to peers, such as Interactive Corp-owned Home Advisors, Angie's List is far, far overvalued.

Here is the report, if you'd like to read through the details.

Fair?
It's a compelling case against the web-based company, which trades at nearly 10 times revenue. To me, though, the details are nearly irrelevant. Investors should avoid Angie's List today because it is ridiculously valued, with no indication that it can fulfill the expectations implicit in its pricing. I doubt the company is, as mentioned in the report, a pyramid scheme-like business. Like other listing services, businesses do have to pay up big time to be put in the top 10 or top 5 listings -- that's how the service makes money.

As far as customer satisfaction goes, some quick research does show distaste. It may seem ironic, but go on Yelp and type in "Angie's List." You'll find a number of plumbers and other skilled professionals with reviews from people who used Angie's List. For my town (Los Angeles), the first page was riddled with Yelp users complaining about the business listed, which they originally found via Angie's List. Is this a surefire indicator that the company is no good and unsustainable? No, but it does raise another red flag in what appears to be a red-flag store.

Foolish call
From personal experience, Citron Research reports can be sensationalist and very leading. Moreover, investors know the firm is short the stock -- this is how it makes money. That is not to say that the information is inaccurate or otherwise, but understand that this is not quite a Robin Hood service.

That said, Angie's List stock is unbelievably expensive. Even with the doubling revenues every couple of years, operating income has traveled in the opposite direction. Getting a business to scale, especially in this space, is very expensive, but investors need more evidence that the capital is going to good use.

In summary, I heartily recommend that investors steer far clear from Angie's List for the foreseeable future.

 

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